Intergovernmental Grants and Transfers

The design and implementation of intergovernmental grants in North Carolina have made their way to the forefront of state news this week. Senate Bill 369, or the Sales Tax Fairness Act, introduced by Republican Senate Majority Leader Henry Brown, would alter the manner used to distribute sales tax revenues that are returned from the state to local governments. The formula proposed by the bill would replace the existing formula for redistribution of the sales tax, which currently doles out funds via a scale weighted 75% based on the point of sale and 25% based on population. The new formula would be based wholly on per-capita redistributions; location of sale would not be considered.

This means that 75 cents from every one dollar generated from the 2% local portion of the sales tax remains in the county in which the sale was conducted. The remaining 25 cents is distributed across the state on a per-capita basis.  As a result, larger counties, and those with more retail options and tourist attractions are able to keep larger pots of money, whereas rural counties are not. The snag is that because these rural counties don’t have sufficient retail or commercial centers, they have to go to the urban centers or other more-populated areas and end up spending their money there and having less allocated back to them through the current distribution system.

Under Senate Bill 369, the legislature would control the estimated $2.2 billion generated in local sales tax and convert it to a state sales tax. The revenue would then be distributed on the per-capita basis. With the proposed system, over ninety counties would see an increase in the amount of funds they would receive, while only eight would see a decrease. The total amount of overall winners and losers is not the only point to consider - how large a change in funding is critically important, especially to those expecting a decrease. Of those counties expecting a decrease, Dare County would take the largest loss – seeing a nearly 60% reduction in sales tax revenues. The potential lost sales tax revenues for the county and the towns within it could total $16.7 million. Many of the other counties that would lose money are those home to the state’s many beach and resort towns and are seen as the economic engines of the state.

The potential for such a change has ignited strong opposition from some state lawmakers. Cries of “socialism” have emerged. Even the Governor, Pat McCrory, is opposed. But other lawmakers equally as strongly contend that the current system is unfair, and Brown is leading the pack. “North Carolina’s antiquated system of redistributing sales taxes is unfair… it provides a huge advantage to a few rich areas that are booming while hurting the overwhelming majority of our state’s counties.”

So what do you think? The map below shoes the percent changes in revenue by county across North Carolina. A far greater number stand to benefit from the proposed change. Do you think that this reason alone is enough justification to alter the tax structure?